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Everyone knows it’s better to give than it is to receive, right? Well, when it comes to your business, it turns out that you can do both at the same time. Just as you can expense business meals and entertainment, you may also deduct a portion of the amount you spend on gifts for colleagues, clients, and employees. There are, however, some limitations as to who you can give to, what you can give them, and how much of a deduction you can receive in return. So whether it’s a basket of holiday cookies or tickets to a Beyoncé concert, here are four things you need to know about successfully deducting business gift expenses.

1. You can only deduct up to $25 per business gift.

We know you love your client almost as much as your client loves that gold-plated basket of pears. But as far as the IRS is concerned, you can deduct no more than $25 for each business gift per recipient for each tax year. It doesn’t matter whether you send that gift directly to your client, to their department, or to a member of their family. That $25 limit applies to everyone that may have benefited from your gift, even indirectly. However, if you send a set of gold watches to Mr. and Mrs. Smith, you will still be allowed to deduct $25 from each, provided that you have a separate (work-related) connection to each spouse.

2. You can’t deduct incidental costs.

Let’s say you’ve found that perfect gift for your IT department. While you always have the option of plopping it down in the middle of their desks unadorned, you’re probably going to want to wrap it first. Not to mention, giving gifts to partners at other companies means paying for shipping and handling. Know that in most cases, packing and mailing costs are considered “incidental,” and cannot be deducted. But if the packaging is considered to be part of the gift, like a hand-woven tote, its cost can be included in your deduction. Think the difference between wrapping paper and a decorative basket. Incidental costs may also refer to additional features that enhance the gift without substantially increasing its value–such as engraving.

3. Pens for everyone!

Certain kinds of items are considered to be exceptions to the $25 rule, and will not be counted towards your business gift expense limit. For example, you don’t need to include any widely distributed items that bear your name so long as they cost $4 or less. These small gifts most often manifest as pens, frisbees, and stickers with your company’s logo on them. Other strictly promotional items, such as signs or giant cardboard cutouts for display in your recipient’s storefront, are also not considered “gifts” for the purposes of the $25 deductible.

4. Are you not entertained?

According to the IRS, “any item that might be considered either a gift or entertainment generally will be considered entertainment.” (IRS Document 463 Ch. 3) So when in doubt, err on the side of an entertainment expense. But let’s say you give a client some tickets to an upcoming concert. If you attend the concert together, the cost of admission is automatically considered an entertainment expense. But if your client goes without you, you get to choose whether those tickets will be filed as entertainment or as a business gift expense. You are also free to change your mind about how to classify the expense, even after its been submitted to the IRS. If, after deducting the tickets as a gift, you determine that it would be more accurate (or more beneficial) to expense them as entertainment, you have three years to file an amended return.

You can keep track of all your business expenses, including business gifts, with Tallie’s award-winning expense report automation software. See how we can improve and simplify your accounting workflow FREE for 14 days – no credit card or commitment required. You can also schedule a product demo with one of our experts to help determine the best workflow for your business.

Taking a client out to dinner may be as common a business practice as buying a plane ticket, but deducting it can be a whole other story. Entertainment expenses, such as the cost of meals and shows, are subject to particular scrutiny from the IRS. The complicated, ambiguous rules surrounding these kinds of expenses can make it difficult for business owners to know which costs are deductible. We here at Tallie wanted to help cut through the ambiguity and give you a better idea of what qualifies as an entertainment expense, and how it can be successfully deducted.

First, the entertainment must be considered ordinary and necessary. While these terms may sound a little vague, in this case, “ordinary,” simply means that the form of entertainment is commonly practiced within your trade. A round of golf with a potential client? Sure. An extravagant dinner complete with a $600 bottle of wine? Probably not going to fly. And despite what it sounds like, “necessary,” does not actually mean that your company’s success hinges on your picking up the dinner tab–the IRS only requires that it be demonstrably helpful for your business.

Next, your expense must meet one of two tests in order to prove that the entertainment is “closely related” to work:

1. The “directly-related” test.

In order to pass this test, you need to be able to prove that “the main purpose of the combined business and entertainment was the active conduct of business.” (IRS Publication 463: Ch. 2) In other words, unless the festivities took place in a “clear business setting,” you must have had real reason to believe they’d lead to a specific benefit for your business, such as increased income, or a partnership with a new supplier.

A clear business setting can be a number of places, such as a designated booth at a convention, or even an office breakroom. Of course, there’s only so much entertainment to be had around a water cooler. For all other venues, not only must the “main purpose” of the expense be the active conduct of business, the location must be distraction free. It doesn’t matter how hard your team toiled away on those spreadsheets in the middle of the club last night–if you couldn’t hear each other over the music, it probably wasn’t a very productive meeting.

2. The “associated” test.

This test can be much easier to pass. According to the IRS, your entertainment expense may be considered deductible if it was “associated with the active conduct of your trade or business,” (IRS Publication 463: Ch. 2) AND if it occurred “directly before or after a substantial business discussion.”

How direct is directly? Essentially, the discussion (ie: meeting, negotiation, etc.) must take place on the same day as the entertainment. Exceptions can be made in extenuating circumstances–if your clients are coming in from out of town, for example, or if strict venue scheduling requires an event to take place the following evening. Whether these extenuating circumstances are approved, or whether the business discussion is deemed sufficiently substantial, is solely up to the IRS. You should always be prepared to explain how the discussion benefitted your business, as well as any working relationship with the client or business associate.

Generally, if your entertainment expenses meet the above requirements, they can be deducted for 50% of the total cost. That being said, there are a number of circumstances in which the 50% rule does not apply. If you provide food and entertainment for the general public on behalf of your business, this is considered as either advertising or a means of “promoting good will.” And, of course, if you went to the movies in your capacity as a professional film critic, the cost of admission would be considered a fully deductible business expense.

Which forms of entertainment are just plain not deductible? Well, you may not deduct the cost of leasing a facility designed exclusively for entertainment, such as a yacht or a hunting lodge. Nor can you deduct membership dues for any golf or country clubs. And when it comes to lavish or extravagant dinners, you may only deduct 50% of what the IRS determines to be a reasonable cost. If you spent $1,000 on a dinner that should only have cost you $100, you will probably only be able to deduct $50, as opposed to the full $500.

For more details, you can look to our previous post on what the IRS considers to be lavish and extravagant vs. ordinary and necessary expenses. This is especially important when deducting business gift and entertainment costs. As makers of expense report automation software, we understand it’s sometimes difficult to know which entertainment costs can be expensed and which don’t qualify. While it might be frustrating that the rules for what’s acceptable aren’t always cut and dry, just remember that common sense and frugality will go a long way.

Save valuable time with Tallie’s award-winning expense report automation software. See how we can improve your accounting workflow FREE for 14 days with no credit card or commitment required. Want some one-on-one help from our trained product experts? Schedule your free Tallie product demo today!

Tallie is business expense report automation software designed to simplify expense management process, from point of purchase all the way through accounting and reimbursement. Advanced tools provide powerful integration with leading accounting & bill pay solutions, as well as precision control over approval processes and policy compliance.